How over-the-top video actually helps the cable industry

Cable companies are increasingly stuck between a rock and a hard place: On one hand, they’re stuck feeding the big-media beast, which demands that they pay more to content partners for the programming that runs on their systems. On the other, they’re faced with a gloomy economy which means fewer subscribers can pay for that content. That conundrum has gotten some cable execs actively talking about shifting their focus from traditional pay TV services to offering broadband services as their anchor products.

The latest to consider the possibility is Cablevision COO Tom Rutledge. As reported by Multichannel News, Rutledge said at an investor conference yesterday that streaming services from companies like Netflix and Hulu could help defray the ever-rising content costs that cable companies are forced to pay. He said:

“The rich [programming] package we provide is extremely valuable to customers and there is pricing power in that package… On the other hand, you have people experimenting with over-the-top television, which if successful would tend to make that package less stable, which will change the balance of costs. I’m not sure how that goes.”

Rutledge went on to say that he would offer Netflix as a service on his cable system, if he could. He also highlighted Cablevision’s Optimum Link PC-To-TV service, which lets consumers stream over-the-top content from their computers to their TVs.

“Our goal is to put everything that’s on the Internet on all the screens in the house,” Rutledge said. “We’re moving rapidly to make that technology work even better and we think within a matter of months we’ll have a very robust system where customers can take their Netflix product, whether they have a device that carries Netflix or not , or Hulu or any other over-the-top service and put it on the TV. To the extent that that has a moderating effect on our programming costs, that’s good. To the extent it satisfies customers, that’s good.”

As we’ve written in the past, focusing less on the pay TV services that cable companies offer today and focusing more on broadband services wouldn’t necessarily be a bad idea. For one thing, high-speed Internet services typically have much higher margins than traditional video services. That’s mostly because cable providers don’t have to pay for the content that runs over their broadband pipes.

Rutledge made his comments at the same time that some analysts are beginning to question the viability of the cable package as it’s currently priced. In a research note issued yesterday, Bernstein Research Senior Analyst Craig Moffett highlighted what he called an “affordability crisis” for the pay TV sector, due to rising cable prices at the same time that consumers face deeper macroeconomic pressures:

“After the necessities of food, shelter, transportation and healthcare each month, the bottom 40% of U.S. households have already exhausted all of their disposable income. There is nothing left for clothing… for debt service… for cable… or for phone.”

Offering attractive broadband packages is one way that Cablevision could keep those subscribers, without having to worry about rising content costs. And it’s a way consumers could choose what content they want to watch or pay for, without paying for hundreds of cable channels they don’t watch.